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F I S C A L I M P A C T R E P O R T

SPONSOR SJC

DATE TYPED 10/07/05 HB

SHORT TITLE Emergency Anti-Price-Gouging Act

SB 3/SJCS

ANALYST

Medina/ Francis/

Quezada

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$1,000.0

Non-Recurring

General Fund

Operating

Reserve

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to the Unfair Practices Act (Chapter 57, Article 12 NMSA 1978)

Conflicts with Senate Bill 3 and House Bill 9

SOURCES OF INFORMATION

LFC Files

Federal Trade Commission

National Consumer Law Center

Office of the Governor

FindLaw

Library of Congress

Responses Received From

First Judicial District Attorney

Attorney General

SUMMARY

Synopsis of Committee Substitute

Senate Judiciary Committee Substitute for Senate Bill 3 authorizes the governor, with State

Board of Finance approval, to transfer $1,000.0 from the general fund operating reserve to a pro-

posed anti-price-gouging fund for the attorney general to investigate and prosecute alleged viola-

tions of the Emergency Anti-Price-Gouging Act. The release of funds would be authorized for a

single period of abnormal market disruption.

The bill prohibits the sale, rent or lease of goods or services--including gasoline, natural gas, and

Senate Bill 3/SJCS -- Page 2

heating oil--and other goods necessary to preserve, protect, or sustain life, health or safety for an

unconscionable price during a period of abnormal market disruption. The charging of such a

good or service at an unconscionable price is the practice commonly known as price gouging. A

period of abnormal market disruption is declared by executive order after any federal or state

declaration of emergency or disaster has been made, subject to the governor’s determination that

the emergency or disaster has caused an abnormal market disruption until the governor deter-

mines that the period should cease. A period of abnormal market disruption is defined as a

change in the market resulting from an emergency or disaster where market forces are or appear

to be likely to be insufficient to ensure reasonably stable prices of good or services.

In an executive order determining an abnormal market disruption, the governor is to specify the

geographic regions within which the restrictions imposed by the Anti-Price-Gouging Act apply

and those categories of goods and services to which the restrictions imposed apply.

The committee substitute defines the allowable length of a period of abnormal market disruption

to thirty days per executive order and a limit of 120 days per market disruption. Further exten-

sions of the executive-ordered period would be subject to authorization by the legislature through

joint resolution. Any declared period of abnormal market disruption could also be terminated by

a legislative joint resolution.

The bill requires that evidence of price gouging lies in proving that the price that a violator

charged for an eligible good or service was more than ten percent above the average price in the

same market area during the twenty days prior to the even causing the emergency or disaster that

resulted in an abnormal market disruption. This constitutes prima facie evidence that the price of

that good or service was unconscionable (See Significant Issues).

Enforcement. Persons found guilty of continuous and willful violation of the Act would be sub-

ject to a court’s suspension or revocation of their business licenses and may be banned from con-

ducting business in the state. Persons found to have charged an unconscionable price in violation

of the Act may also be required by a court to disgorge (expel) excess profits realized from the

violation. Violations of the Act would also be considered unfair or deceptive trade practices and

thus subject o the provisions of the Unfair Practices Act (Chapter 57, Article 12 NMSA 1978),

including the attorney general’s original jurisdiction over the implementation and enforcement of

the Unfair Practices Act. The power to serve emergency civil investigative demands requiring

response within three business days is also vested in the attorney general. Finally, all state agen-

cies are to cooperate with the attorney general in the investigation of alleged violations of the

Emergency Anti-Price-Gouging Act.

Significant Issues

The main difficulty in determining whether the price of a good or service is unconscionable lies

in the determination of price prior to the event and the changes in the components of the price.

Anti-price-gouging laws have been challenged on the basis of the inherent subjectivity of this

determination. A violation of this Act would occur when a vendor charges a price deemed insuf-

ficiently supported by market forces. However, several variables make this determination diffi-

cult.

First, defining the benchmark price of goods and services is complicated by the characteristics of

the market area. If price-gouging is alleged to have taken place at a prime location, say at the end

Senate Bill 3/SJCS -- Page 3

of the off-ramp of an interstate, the “market area” should include other retailers similarly located

and not ones in more competitive locations. The heterogeneity of retailers of goods also creates

concerns for the effects of establishing price ceilings. Large, chain-type retailers will have more

control over prices and have different incentives than small, local retailers. In some cases, par-

ticularly for a highly visible emergency like a natural disaster, a large well-known company may

have a public relations incentive to keep the price lower than what the market justifies.

The bill includes a non-exclusive list of four factors that could be used to determine whether a

price is unconscionable:

Exercise of unfair economic or other advantage. An example of an unfair economic advantage

is when the buyer has no control over the decision making process. This is usually the case

when there is no other seller of a good or service in a reasonable proximity. A buyer may have

no recourse in the market place to a price offered by that vendor and so has no control over the

decision if that good or service is essential.

Price difference between alleged violator and market area twenty days prior to event. This

exists when the price of a particular vendor significantly exceeds the price in the immediate mar-

ket area. Determining an appropriate “market area” will be the challenge of this method. If the

alleged violator is near an access point (i.e. an interstate ramp), is the market price of the

good/service all others at that access point or the community at large. Another consideration is

whether the vendor has always been higher than the market area even in non-emergencies. There

are cases where retailers, due to visibility or particular locations or even brand identification, can

command a higher price than surrounding retailers.

Profit margin difference. This factor would capture all of the input prices and thus isolate the

cause of the higher price of the alleged violator. A significant difference in profit margin before

and after a significant event would provide an example of undue price influence. However, de-

termining profit margin difference would likely be controversial to vendors since profit margins

are generally thought of as confidential information crucial to competition. It would not be im-

probable to envision a competitor making allegations for the sole purpose of discovering profit

margin information.

Increase not directly attributable to increased costs imposed by supplier. This factor is

similar to the previous in that it attempts to isolate that portion of the price that is “unconscion-

able.” Once again, the definition of “market area” will be crucial to understanding the price dif-

ferential. Smaller retailers have limited ability to negotiate with suppliers during a time of short-

age and so can be subjected to higher prices.

The bill also prohibits increases in motor fuel prices more frequently than once in twenty-four

hours. Price controls may have the effect of limiting supplies at a crucial time if a retailer is

faced with losing money due to timing of an order from the distributor. According to the Seattle

Post-Intelligencer (September 19, 2005), in New Jersey, a state with anti-price-gouging protec-

tions, inspectors looking into allegations of price gouging at 400 gas stations in the states issued

more than 100 violation citations, but none were for price gouging. Instead, gas stations were

cited for raising the price of gasoline more than once in a twenty-four hour period.

Senate Bill 3/SJCS -- Page 4

FISCAL IMPLICATIONS

The authorization for the transfer in case of an emergency of up to $1,000.0 contained in this bill

is a nonrecurring expense to the general fund operating reserve. Any unexpended or unencum-

bered balance remaining in a newly-created anti-price-gouging fund at the end of a fiscal year

shall not revert to the general fund. Rather, any funds remaining are to remain to the credit of the

anti-price-gouging fund until the attorney general completes the investigation and prosecution of

a violation. The costs to the attorney general of obtaining prima facie evidence that a price

charged for a good or service is unconscionable would require issuing subpoenas for business

records, obtaining search warrants, and economic analyses, among other activities.

Should a transfer of funds pursuant to this bill take place on or before the first day of a regular

legislative session that convenes at least 120 days after the declaration of a period of abnormal

market disruption, the attorney general is to report to the legislature on the funds received and

expended from the Anti-Price-Gouging Fund. The report is to include details of expenditures and

anticipated expenditures, and whether the attorney general anticipates that the balance in the fund

is sufficient to perform its investigative and prosecutorial responsibilities.

By controlling the prices of goods and services, this bill invites two significant possible market

effects that would have revenue implications—price effect and demand effect. The price effect

of price controls for goods and services subject to gross receipts tax in an emergency period en-

tails lower revenues than could be attained without the controls. The demand effect, by which

demand for a product increases with lower prices, entails a positive effect on tax revenues for

goods and services subject to an excise tax which is calculated on volume sold.

The fines associated with the successful prosecution of violations may also offset any revenue

loss.

ADMINISTRATIVE IMPLICATIONS

As the primary enforcer of the Unfair Practices Act, the Office of the Attorney General’s Con-

sumer Protection Division has the resources to investigate, mediate, and prosecute cases related

to consumer protection and would also have original jurisdiction of the Emergency Anti-Price-

Gouging Act.

RELATIONSHIP

The Unfair Practices Act (Chapter 57, Article 12 NMSA 1978) prohibits unfair or deceptive and

unconscionable trade practices but does not provide for price control mechanisms related to cir-

cumstances of emergency or disaster-related market abnormalities.

Similar legislation at the federal level is currently under consideration by the U.S. House of Rep-

resentatives. House Resolution 3681 proposes to amend the Clayton Act to make unlawful price

gouging for necessary goods and services during Presidentially-declared times of national disas-

ter. H.R. 3681 includes provisions similar to those in this bill for the determination of an uncon-

scionable price.

Senate Bill 3/SJCS -- Page 5

TECHNICAL ISSUES

In the case of a hurricane in the Gulf Coast area, a state of emergency was declared for the area

both by the federal and state governments. No state of emergency existed for New Mexico and it

is unclear from the legislation whether the declaration has to be for New Mexico or can be for

any state or region.

OTHER SUBSTANTIVE ISSUES

According to the Office of the Governor and the National Consumer Law Center, at least nine-

teen states have laws or regulations that prohibit price-gouging on petroleum products or other

goods in the aftermath of disasters. New Mexico is one of four states not directly affected by

Hurricane Katrina that are currently taking action on alleged price gouging. These efforts are a

targeted response to spikes in gas prices since Hurricane Katrina.

According to the Seattle Post-Intelligencer (September 19, 2005), the Federal Trade Commission

(FTC), which investigates suspected violations of price gouging using broad laws regulating an-

titrust practices and collusion between businesses, has never brought a gas-price-gouging case.

ALTERNATIVES

Section 15 of this bill calls for a liberal interpretation of the Act in order to carry out its purpose.

The Unfair Practices Act’s section on the interpretation of the prohibition on unfair or deceptive

and unconscionable trade practices (Section 57-12-4 NMSA 1978) reads: “It is the intent of the

legislature that in construing [this provision] of the Unfair Practices Act the courts to the extent

possible will be guided by the interpretations given by the federal trade commission and the fed-

eral courts.” LFC staff recommends substituting this or similar language for Section 9 of this bill

in order that the Act be consistent with current criminal statutes, which are strictly construed.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

If this bill is not enacted, current statutes would not include provisions for investigating allega-

tions of price gouging during a state of emergency or abnormal market disruption, nor for impos-

ing penalties for persons engaged in price gouging. By not enacting this bill, the state’s economy

would be allowed to react to states of emergency or abnormal market disruption as a free market

economy.

POSSIBLE QUESTIONS

Has it been determined that price gouging has had a significant negative impact on the state’s

economy.

How successful have efforts in other states been at combating price gouging, in particular at the

gas pump.

If a state of emergency is declared for which what are the implications of that declaration. In

other words, what resources are automatically mobilized following an emergency declaration

that are unnecessary to the public safety of New Mexicans.

Senate Bill 3/SJCS -- Page 6

Is it conceivable, following the liberal interpretation called for in Section 15 of this bill, that an

executive emergency declaration in which no disaster, natural or otherwise, has befallen in the

state, could be used to justify enacting the price controls contained in this bill.

XM:NF:SQ/yr